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Fiscal Responsibility ‘Ineffective’ Without Tougher Sanctions

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fiscal Responsibility legislation could be “ineffective” without tougher sanctions due to “The Bahamas’ poor history of non-compliance with similar laws”, a civil society group warned yesterday.

The Organisation for Responsible Governance (ORG), unveiling its recommendations on the draft Bill, said the main concern was the “lack of codified penalties [and] sanctions” for governments that breached its targets, or “incentives” that encouraged compliance.

It also called for the independent, five-member Fiscal Responsibility Council that currently has just an oversight and advisory role to have more power to “proactively contribute to fiscal strategy and decisions, and enforce its advice, recommendations and decisions”.

“Throughout the Bill there is a noticeable lack of reference to penalties or incentives to encourage compliance and rectify behaviour in the implementation of fiscal responsibility and discipline processes,” ORG said. “Where there is mention of penalty, said penalties are not defined or codified and are left to Ministerial discretion, allowing room for uneven or unfair application, or the perception thereof....

“Given the Bahamas’ poor history of compliance with similar reporting laws, such as Public Disclosure, there is concern that without methods of enforcement there is a risk that the Fiscal Responsibility Bill could ultimately be ineffective despite its thorough reporting mandates and methodically outlined goals.”

ORG’s recommendations, issued yesterday, mirrored concerns voiced by fellow civil society organisation, Citizens for a Better Bahamas, which acts as the local Transparency International representative.

Its principal, Lemarque Campbell, last week told Tribune Business that the Fiscal Responsibility Bill needed “more teeth” against governments that frequently breached its mandates, and failed to achieve both the fiscal deficit and long-term debt-to-GDP ratio targets set out in the legislation.

Explaining ORG’s call for the Bill to include a codified “system of penalties and incentives”, Matt Aubry, its executive director, conceded to Tribune Business that not all countries incorporated such sanctions in their own legislation,

“Having these mandates [targets], the biggest challenge becomes having compliance and a level of enforcement to ensure these mandates are met,” Mr Aubry explained. “There are some places that include penalties and sanctions, and some that don’t.

“Brazil has sanctions, Australia has some mechanism for sanctions, and others have sanctions in other legislation and incentives. Some others, like New Zealand, don’t.” Mr Aubry then pointed to Nigeria, where its Independent Fiscal Responsibility Council - similar to the body proposed in Bahamian law - was now calling for enforcement measures to be codified legally.

Nigeria presently lacks sanctions, but Mr Aubry said the Bahamas “looks a bit more like Nigeria, not New Zealand” at its current stage of development and “where we are as country”.

He added that the Bahamas’ follow through on enforcement “hasn’t historically been that strong”, hence the need for greater enforcement and sanctions powers in the Fiscal Responsibility Bill.

The present draft merely requires the Minister of Finance to appear before Parliament’s Public Accounts Committee and “explain the cause” of any breach of fiscal targets, responsibility objectives and adjustment plans.

If the Committee is dissatisfied with the Minister’s explanation, and proposed corrective action, it can only “recommend that Parliament consider a resolution” requiring either that “action” be taken to improve the situation or additional progress reports.

The Committee can recommend to the Minister of Finance that “a financial or other penalty” be levied against public officials who breach the Fiscal Responsibility Act, but given the fiscal profligacy of successive administrations, many are likely to agree with ORG and Citizens for a Better Bahamas that the enforcement powers need to be beefed up.

Mr Aubry said the Committee’s powers lacked “specific parameters” and, as a result, there was a lack of understanding as to how the current provisions work and if penalties are pre-determined.

He suggested the Bill’s current drafting left the Committee’s powers vulnerable to being both “overused and underused”, and added: “Absent a better definition and given more teeth, we’d agree with Citizens for a Better Bahamas, particularly around the process of any sanctions and incentives to drive enforcement and compliance.”

As for the Fiscal Responsibility Council, Mr Aubry said ORG supported its members being drawn from five different private sector organisations - the Bahamas Bar Association; Bahamas Institute of Chartered Accountants (BICA); Chamber of Commerce; Financial Analysts’ Society; and University of the Bahamas - and being nominated by the House of Assembly speaker.

“I think that is really important, and a much more positive step in Bahamian legislation,” he added. “That does speak top a level of independence we’ve not seen. It could be more so, but it’s a step in the right direction.”

However, ORG said of its concerns: “The function of the Fiscal Council, as stated in Section 17, seems to be limited to retroactive assessments and ‘shadow reporting’ on fiscal performance and compliance, and furthermore there seems to be no legislated means to require government heed said reports.

“The Fiscal Council would be more effective in its objective to drive compliance and performance if it were proactively included as a consultant or contributor in key policy development, such as fiscal adjustments, amendments to the schedules, determination of breaches, and the assessment of timelines, amongst others.”

ORG also called for provisions that requires governments to give “meaningful consideration” to the Fiscal Council’s reports and recommendations. “The law requires the reports but sets no expectation on how those reports should be received or utilised by the Government,” it added.

“Nor does the law outline any recourse the Council might have in the event that it disagrees or advises against actions taken by government, or if its advice or recommendations are repeatedly disregarded by The Minister or other government actors.

“ORG advises that The Council be proactively included in development of timelines, objectives, and policies beyond the retroactive shadow reporting body structured in the Bill. Furthermore, ORG suggests that clear responsibilities of government on the treatment and consideration of advice and content from the Council be outlined within the legislation.”

Mr Aubry, though, praised the Government’s decision to draw on “global standard” legislation from New Zealand and other nations in drafting the Bahamas’ own Bill. He also backed the decision to set numeric targets for the fiscal deficit and debt-to-GDP ratio - something not all nations do.

“When you look at places like the Bahamas you can say having numeric guidelines makes sense because it shows what you’re trying to work towards,” Mr Aubry told Tribune Business. “Having real, specific guidelines, some legislation doesn’t do that.

“It talks about adopting specific processes but doesn’t talk about criteria and benchmarks that have to be achieved. We would endorse having those specific guidelines and mandates.”

The Fiscal Responsibility Bill’s key targets require the Government to slash the fiscal deficit to 0.5 per cent from 2020-2021 onwards, slashing it from a sum equivalent to 5.8 per cent of GDP in the 2016-2017 Budget year. This means reducing it from near $700 million to around $54 million.

The Bill’s ‘first schedule’ sets out a ‘glide path’ or ‘road map’ for achieving this, acknowledging - as the IMF stated - that “significant fiscal adjustments” are needed over the next two Budget years to hit this objective.

To enable the public sector and wider Bahamian economy “to achieve the fiscal objective in an orderly manner”, and avoid unnecessary shocks, the Bill calls for 2018-2019 and 2019-2020 deficits that “shall not exceed” 1.8 per cent and 1 per cent of GDP, respectively.

The Bill also sets out a “long-term” target of reducing the Government’s direct debt-to-GDP ratio from the current 58 per cent to “no more than 50 per cent”. The year by which this target is to be achieved has to be set out in the Government’s ‘fiscal strategy report’, which must be submitted to Parliament no later than the third week of November each year.

ORG, though, said shrinking the annual fiscal deficit to 0.5 per cent of GDP within three years was “an ambitious goal”. It also expressed concern over “the sweeping powers” granted to the responsible Minister to make regulations accompanying the Bill, arguing this opened it to “misuse”.

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